The potential collapse of the $10.6 billion buyout of Huntsman Corp. (NYSE: HUN) is hardly a shock.
For one thing, rising oil prices are crushing specialty chemical makers. Another thing is that the deal was announced almost a year ago, an eternity for the closing of a merger and acquisition. The Wall Street Journal argues that private equity shop Apollo Management and its Hexcion Specialty Chemicals Inc. are making a "novel" argument to get out of the deal.
"In a complaint filed in the Delaware Court of Chancery, Hexion said Huntsman's poor financial results -- increased net debt and lower-than-expected earnings -- would render the combined company insolvent," the paper said, adding that legal experts expect Huntsman to file a countersuit. Of course, shares of Salt Lake City-based Huntsman were plunging in premarket action and will likely open much, much lower. CNBC's David Faber points out that the Huntsman deal was "held out" to be the strongest of the LBO deals. That's scary. In a press release, Huntsman CEO Peter Huntsman said, "These actions appear to be a blatant attempt to deprive our shareholders of the benefits of the Merger Agreement that was agreed to nearly a year ago." The company added that it intends to "vigorously enforce" its rights under the merger agreement and seek to consummate the merger under the agreed upon terms.
Like water-torture, the drip, drip, drip of bad news out of Wall Street keeps coming. According to a report in The Wall Street Journal, Merrill Lynch (NYSE: MER) will report mortgage securities write-offs of another $6 billion to $8 billion, raising the question whether the firm will have to bring in more money by selling shares..
The newspaper reports that "The latest would bring its total since October to more than $30 billion and mean that Merrill reports a third straight quarterly net loss." Merrill compounded its problems by getting further into the CDO markets as 2007 went on.
While some experts believe that the worst is behind big banks and brokerages, that may not be true. The paper based on mortgages still carries risk as the housing market continues to fall.
Statements from Wall Street firms about a near-term recovery is a victory of hope over reason. The truth of the matter is that they have no idea how much more the economy will slide. That raises the question of whether home equity loans, credit card debt, and auto loans will begin to fail at a faster rate. There are securities held by banks based on pools of all of this debt. The value of LBO debt could also continue to drop as business profits are squeezed by a poor economy.
The Merrill write-down is a sign of one thing and one thing only. Wall Street's numbers could get much worse and there is little reason that the economy will help them get better.
Douglas A. McIntyre is an editor at 247wallst.com.
Pay the break-up fee. Don't make that next LBO loan. That is what many legal advisers are telling the largest banks. Better to pay out the fee than take on loans which could lose a significant portion of their value and could lead to more big write-offs.
A partner at a large private equity firm told the FT, "The banks have so many issues with their balance sheets that they are considering a new policy."
The idea may sound good, but it isn't.. If banks walk, they could face shareholder suits from owners of the companies which have been stiffed in the LBO process. But, more importantly, the action would drive a wedge between banks and their large corporate clients that could last for years. Corporate banking profits go well beyond providing buyout loans.
Acting in bad faith with one of the biggest customer bases at big banks may save money now, but is the alienation of corporate customers worth it?
It has looked like LBO loans were going to be hard for banks to syndicate to institutional investors. They tend to be fairly risky because the companies taken private often have to do very well to cover the debt service. Concerns about that happening in a recession are growing.
All of this means that big money center banks are being stuck with the loans. Since they are almost certainly worth less than their face value, that could lead to another round of write-downs at banks.
According toThe Wall Street Journal, "with the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do." JPMorgan (NYSE: JPM) held $26.4 billion in LBO loans at the end of last year. Other large banks probably have similar amounts on their balance sheet. Many of these will be sold for 90 cents on the dollar, if they get sold at all.
Banks may have another series of financial problems just around the corner.
Douglas A. McIntyre is an editor at 247wallst.com.
You think subprime is a mess? We may have another big-time problem -- the leveraged buyout (LBO) binge. This week's Barron's [a paid publication] has a good piece on the matter.
Private equity firms tend to focus on mature companies, which produce lots of cash flows. There is usually a good amount of cost-cutting as well. But for the private equity firms to make real money, they need to pile on the debt. This is fine -- so long as there is enough cash flow.
Unfortunately, it looks like the U.S. economy is slowing down. As a result, some LBO deals may fall apart because they can't meet debt payments.
Wall Street is already getting nervous. For example, Barron's points out the sluggish bond prices for companies like Realogy, Swift Transportation, Linens 'n Things, Claire's Stores and Dollar General. Some buyout deals are even trading at about 50 cents on the dollar.
All in all, we may see wipe-outs of the equity stakes for private equity firms. It's a good bet that the returns -- for 2008 to 2009 -- will pale in comparison to the boom times.
Another private equity deal is crumbling. Acxiom (NASDAQ: ACXM), which was to be bought out by ValueAct Capital Partners LP and Silver Lake Partners for $2.25 billion , is now negotiating break-up fees with the firms. The private equity companies had made a $27.10 in cash offer for the data management company.
According toThe Wall Street Journal "one of the issues likely to be discussed is whether the company has breached the deal's material adverse-effect clause." Operating income at the company did drop 89% in the June quarter and the company has made some lay-offs.
But, Acxiom's board may believe that one weak quarter is not material, especially if the trend of the company's business is up. At some point one of the private equity withdrawals is likely to bring a large suit both from a company and its shareholders.
Acxiom's stock holders are facing a share price that is below $20 and will probably drop further on the announcement. They may not take kindly to that.
Bloomberg News reports that JPMorgan Chase & Co. (NYSE: JPM) will take a $1.4 billion charge for leveraged buy out (LBO) loans gone sour. The good news is that the charge represents only 3.4% of its LBO loans outstanding.
Interestingly enough, relative exposure to LBO loans does not seem to correlate with loss of stock market value in 2007. Here's the list of the eight biggest LBO lenders ranked by their LBO loans coupled with the percent decline in their stock market value since their 2007 highs (excluding Deutsche Bank and Credit Suisse):
The Dow Jones Industrials Average (DJIA) closed below 13,000 today -- the first time since it crossed that mark was on the way up -- on April 24th. Since hitting a record 14,000 on July 19 -- less than a month ago -- the Dow has tumbled 1,139 points, or 8.1%.
I am not sure of many things in life but one thing I can guarantee is that the media will quote "experts" on "what this means for investors." I have nothing to offer here since I have no idea what makes stocks move up and down on any particular day. As best I can tell, the people who control vast swaths of money -- like the $1.7 billion (2006 earnings) man James Simons -- are the ones who know the answer to that question. And the media never gets them to explain.
Nevertheless I have an idea of what is driving the market down -- a credit crunch. There is no money for big leveraged buyouts and the hedge funds are selling their stocks to raise enough cash to pay back the banks to whom they owe as many as $6 for every dollar of assets in their portfolios. I think the market will continue to fall until most of the banks are comfortable that they won't get stiffed on their loans.
Unfortunately I don't know how much stock selling will be required to raise enough cash to satisfy the banks. Nor can I estimate how much the credit crunch will slow consumer spending or crimp corporate earnings. So it would not surprise me if the Dow does not stabilize until it has fallen below 10,000 -- a level it last reached on October 29, 2004.
Home Depot (NYSE: HD) hoped it had sold its HD Supply business to private equity interests for $10.325 billion. Problems in the credit market trashed the deal.
That means that the buyers want a better price because they cannot raise the cake to make the purchase. Obviously, no sane bank or investment firm wants to make a high-risk loan for a high-leverage deal. Not with most of them holding the bags on other deals that they could not syndicate to institutional investors.
Market conditions are also causing the retailer to drop the price at which it will buy its shares in its previously announced "Dutch auction" tender offer to purchase up to 250 million shares of its common stock at a price between $39 and $44. Market conditions have caused the company to drop the price range to between $37 and $42 per share.
If the market needed a sign that the credit markets are on the critical list, this is it. One of America's largest companies lowering the price of a buyback and three premiere private equity firms unable to raise capital for a previously announced deal. Imagine how bad things are getting for less marquee deals.
Home Depot shares are down almost 6% in the pre-market.
It seems inevitable that private equity firm, Carlyle Group, is going to file for an IPO. No doubt, there has been a lot a chatter about it.
Well, according to the FT.com [a paid service], Carlyle has a new CFO Peter Nachtwey. Obviously, this is a critical hire for an IPO (especially in light of the extremely complex issues of alternative investment management companies).
Nachtwey certainly has a sterling resume. He has served as a partner at Deloitte & Touche and even was involved in the audit of the Blackstone Group (NYSE: BX) stock offering.
Although, Carlyle is currently in the process of raising a $15 billion fund. So, in the meantime, it's likely that the firm will focus on that before it makes a filing for an IPO.
But, with $71.4 billion in assets under management, Carlyle should have no problem pulling off an IPO. After all, despite the fall in Blackstone's shares, the valuation is still not cheap. Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.
Forgive me for rekindling a two week old story by Michael Santoli in Barron's (subscription required) July 9, 2007 issue but sometimes I need to ponder things a while. In the story Santoli suggests that FedEx Corp (NYSE: FDX) could "lure a private buyer at a 20% premium or more above it's current $110 share price".
This brings several points to mind about private buyouts and LBO's. Before I get to that let me state, short and sweet, I hate this idea - this would be a bad deal! As a shareholder I do not think 20% is enough. These deals don't happen over night. It often often takes six months to a year to close a deal like this, often longer. The stock closed today around $117, already 6.4% higher.
FedEx has been one of the truly great companies on the planet since Fred Smith started it. Not to slight Mr. Smith, who to the best of my knowledge has only done right by shareholders, but sometimes insiders have taken advantage of shareholders in LBO situations. In particular when they trade old public shares for new private shares and are rewarded twice, the second time, at the public shareholders' expense. It is a conflict if insiders receive favorable treatment as part of the buy-out group to go along with the deal.
I understand why a big company might want to take FedEx private. I do not understand why major shareholders would support such a sale without a much larger premium, and this Santoli does not discuss.
Those of you who are new to BloggingStocks can check out my other stories and read Chasing Value or Serious Money to find more potential opportunities and verify my track record as well.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
Today's New York Times [registration required] discusses the pending initial public offering (IPO) of Kohlberg Kravis Roberts & Co. (KKR). In so doing, it glosses over the role of its founding partner, Jerome Kohlberg. But just because The Times ignores him, that's no reason for you to.
That's because I interviewed him three years ago for the Swarthmore College Bulletin. So without further ado, here's my interview with him:
"Kohlberg was co-founder of the leveraged buyout specialist KKR and is now special limited principal of Kohlberg & Co. His business success began with the simple yet powerful notion that it was better to risk one's own capital than to be an intermediary. "One of my friend's fathers was a merchant banker,' he recalls. "He didn't act for commissions. He stood and fell on his own investments, which he put beside those of other clients. I realized that being a principal was what I wanted.""
In one of the most bizarre episodes I've ever seen in my career as a business journalist, Dow Chemical Co. (NYSE: DOW) today fired a senior executive and a member of the board for engaging in unatuhorized discussions to sell the company.
So let me get this straight.
Romeo Kreinberg, the head of Dow's performance plastics division, and senior advisor Pedro Reinhard decided on their own to contact several huge private equity firms. They engaged in discussions about selling the company and senior management knew nothing about any of it. I guess none of the bankers ever spoke with the CEO Andrew Liveris, which strikes me as extremely strange.
To top it all off, Kreinberg and Reinhard decided to leak their activities to a U.K. tabloid that to put it kindly isn't seen as a major source of information about mergers and acquisitions.
This makes absolutely no sense. Then again, neither did a $50 billion buyout of Dow Chemical.
The company is stumped.
"These employees went to great lengths to hide this from us," Dow spokesman Chris Huntley told CNN/Money. "We have no idea in terms of what their motivations were."
Didn't Kreinberg and Reinhard think their bosses wouldn't notice that they sold the company?
When I first heard about the rumored $50 billion Dow Chemical Co. (NYSE: DOW) buyout, I thought it was speculative nonsense stirred up by a U.K. tabloid. It turns out my skepticism was justified.
Late yesterday, Dow flatly denied that it was having discussions about a leveraged buyout. Wall Street analysts thought a buyout was unlikely. The U.K.'s Sunday Express, which reported the story, first disclosed these rumors in February.
Whenever investors see reports about mergers, acquisitions or buyouts, they need to consider the source. News organizations such as The Wall Street Journal, New York Times, Bloomberg News or the Financial Times are very careful about printing stories about potential mergers and acquisitions. I don't remember a situation where a story where a story from these sources was flatly denied.
Remember that investment bankers use the business press all of the time to promote deals that they are working or would like to work on. This is like the child's game Whisper Down the Lane. Someone talks to someone else about a possible deal which becomes a potential deal than a likely deal. Eventually. people aren't sure how the rumor started in the first place.
But before you discount this story entirely, remember that the Sunday Express didn't come up with this idea by itself. Maybe this was a trial balloon floated by a banker or public relations person. I have no idea whether Dow management has ever spent one second even considering a buyout.
But as the hapless American Idol contestant Sanjaya Malakar shows week after week, anything is possible.
Signs of a coming slow-down in private equity are rolling in the way that news of leveraged buyouts have been for the past few years. On Friday, the Wall Street Journal reported that The Carlyle Group's CEO has written to the firm's employees to tell them to be more conservative, which may be viewed as a sign of a slow-down in the industry.
This weekend's Wall Street Journalreported that Blackstone Group is "in the advanced stages" of planning an IPO for 10% of its management company, which would set the total value of the firm in the $40 billion range. I see this as a sign that Blackstone's partners are ready to "cash out" and don't see an opportunity for much future growth. The Journal speculates that:
Blackstone IPO might well be followed by other well-heeled private partnerships -- whether hedge funds or buyout firms. Should that occur, it would signal a significant shift in the capital markets, which have become dominated by these firms that have prospered because they have access to cheap credit, aren't subject to the regulations governing public companies, and pay the executives at companies they acquire handsomely.
"They're monetizing the reputation that they've built," said Colin C. Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth University's Tuck Business School. "That often means you're at the top."
I think investors should continue to monitor the private equity situation closely. The bull market of the past few years has been driven partly by the growth in private equity, and a slow-down there could mean a slow-down for the entire market.
The potential collapse of the $10.6 billion buyout of Huntsman Corp. (NYSE: HUN) is hardly a shock.
Like water-torture, the drip, drip, drip of bad news out of Wall Street keeps coming. 
Pay the break-up fee. Don't make that next LBO loan. That is what many legal advisers are telling the largest banks. Better to pay out the fee than take on loans which could lose a significant portion of their value and could lead to more big write-offs. 
It has looked like LBO loans were going to be hard for banks to syndicate to institutional investors. They tend to be fairly risky because the companies taken private often have to do very well to cover the debt service. Concerns about that happening in a recession are growing.
and 
. He also operates 
Home Depot
It seems inevitable that private equity firm, 
Today's 
Before the bell: Wall Street headed higher; automakers, retailers in focus
Waiting for the other shoe to drop: The looming credit crisis
Bet on T&A with J&J (JNJ)
